A solid rise in property values during December was welcome news for investors in Perth, but it might be too early to call it a recovery

Good news has finally arrived for Perth property owners. The latest CoreLogic RP Data Hedonic Index shows that Perth dwelling values surged by 2.3% in December, leading the country for a change.

This is a relief for investors who are stuck with loss-making property. But it might be too early to pop the champagne.

The report shows that while values rose solidly in December, they were still down by 0.1% over the quarter. Over 2015, values fell by 3.7% – the biggest drop of all capital cities. This means investors only got a negligible 0.2% total gross return on their investments over the year.

“The largest losses have occurred in Perth, where the average dwelling is nowworth approximately $19,970 less than it was 12 months ago,” says Tim Lawless, head of research, CoreLogic RP Data.

The other bad news is that, in addition to the still-weak prices, rental yields are also falling. Even worse, rental rates are falling faster than the drop in property values – a double whammy for investors.

Anecdotal evidence shows some properties are vacant for around six weeks before they are tenanted. Even then, landlords have to reduce their asking price, some by at least $50/week, to get tenants in.

Too early to call it a recovery?
Robert Mellor, managing director at BIS Shrapnel, says he doesn’t see the recovery some people are touting.

“People talked about the WA market turning around. Sure there are signs that things are a bit better, but prices are still down by about 4% during the year. I can’t see that market turning around or recovering before 2018,” he says.

“The worst is still to come because the construction level is so high. These are detached housing driven by first home owners. They don’t have excess supply for apartments, but they also don’t have pent-up demand from homebuyers or investors. Everyone who wants to get into the market has done so. As such, I expect prices to decline by at least 3% in 2016, and the market is unlikely to bottom out until 2018. This means it’s way too early to get in.”

Mellor points out that while the NSW government has the capacity to stimulate the economy by selling off state assets, the WA government is unable to do this.

“WA suffers from not getting the mining royalty, so they’re not in a similar position to do something.”

Overseas migration into WA has also fallen drastically to just 1.5% growth, he says. This is a far cry from the 3.6% growth it recorded during the 2011/12 peak.

“With population growth now slowing dramatically, we need to see drastic reduction in construction to bring supply and demand into balance,” he says.

Domain senior economist Andrew Wilson agrees it’s too early to call the latest improvement a sure sign of recovery, but believes the rate of decline is slowing.

“Perth is starting to show positive signs now. I think the worst is over. Prices have been falling for two years. Once there’s a sense that the market has found its bottom, I think confidence will return and will lead to Perth recovering again.

“The upgraders are moving to higher-priced properties. Even if they’re selling at a discount, they’re buying more expensive properties. This helps to stem the downward trend in prices. We’re talking incremental movements. Not burst. They are early signs and very fragile. I expect Perth to finish the year in positive territory and prices to start to stabilise by mid-year.”

But Wilson warns investors that it’s still too early to get into the market, despite attractive buying opportunities.

“Even if there are early signs of the market bottoming out, it’s still red zone for investors,” he says. “Vacancy rates are still the highest in the country. I think investors would be worried to find a tenant in the Perth market. It would be a leap of faith to enter the Perth market at the moment. It’s still too early. It needs momentum and it’s not there yet.”

Biggest losers and gainers
As a result of the weaker market, it’s not a surprise to see that Perth markets recorded some of the highest percentages of lossmaking sales. Even more worrying is the fact that these are rising, according to CoreLogic RP Data’s Pain and Gain report.

During the September quarter, 11.4% of homes sold across Perth achieved less than what the vendors bought them for. This is the highest level of loss-making resales since July 2012, the report says. The proportion of loss-making sales has also increased by 5% compared to a year ago.

The report shows that 89.1% of investor stock was sold at a loss during the last quarter of 2015. The areas that suffered the highest resale losses were in the Perth council area, with more than a third (37.1%) of sales making a loss. Mandurah followed at 23.6% and the Nedlands at 20%.

In contrast, the Cottesloe and Peppermint Grove council areas recorded no resales at a loss over the same period.

‘Subi’, as many locals affectionately call it, is one of Perth’s most densely populated areas, and is right on the western edge of the CBD. It’s a trendy suburb with a strong appeal to students and young professionals as well as growing families. The suburb’s mainstay, Rokeby Street, offers a broad range of shopping amenities, while Perth’s iconic Kings Park directly borders Subiaco to the southeast.

Surprisingly, there remain more detached houses than apartments in Subiaco (34%), though this is expected to change as Perth embraces high-density living. But being fairly built up already, the pace of high development should be kept in check.

While Subiaco’s median house values fell by 1% over the past 12 months, this drop is relatively small compared to Perth’s broader price performance. OnTheHouse.com.au remains bullish about Subiaco’s prospects, forecasting 6% growth each year over the next eight years for houses, which would take the median value to $2,008,000.

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